VAT Across Indian States Will Widen Tax Base, Boost Economic Growth

by Robert Lee, Tax-News.com, London

10 August 2001

International tax policy expert, Satya Poddar, a consultant for the Harvard Institute for International Development, the IMF and the World Bank has spoken out in favour of the new single rate of value added tax, due to be implemented across all the Indian states in April 2002, by predicting that it will simplify the current complex system, increase the tax base, and significantly reduce tax evasion and corruption.

The introduction of VAT is seen by many as a step towards a 'common market' for the Indian economy and it is expected to strengthen the hand of Indian manufacturers against both international and domestic competition.

Poddar, who has participated in research projects for the European Commission on the taxation of financial services, advised that the successful components of a sound tax regime comprise good product, good management and full commitment. He said: 'You have lived with a bad tax system. Be ready to live with it for a few more years, but bring out a genuine reform which would have secure revenue base, simpler tax system and more investment and economic growth ... you will have to change your attitude and mind set.'

A new State-level VAT system will have many advantages, according to Dr Pawan Kumar Aggarwal from the National Institute of Public Finance and Policy (New Delhi), not only will the tax base be widened but the total value addition after the first point of sale would be captured under the VAT system. Dr Aggarwal spoke of a recent study of the electronics sector which showed that the value addition after the first point of sale was 400 per cent.

This reflected not only genuine value addition at subsequent stages by way of transportation, packing and repacking, and selling costs, but also the undervaluation indulged in by dealers at the first (and only) point of tax. During a speech he gave to the Madras Chamber of Commerce and Industry Dr Aggarwal said the VAT system has an inherent disincentive against evasion because at every stage of sale, the buyer will require an invoice in order to claim back credit for the tax paid by him on his purchases.

However, there will of course be many details for the Indian government to address. For example, during another Chamber of Commerce and Industry meeting, this time in Goa, many representatives from the business sector claimed that the new VAT system would add a further burden to their administrative tasks - most local Goan industries largely depend on other states for its raw materials but the tax can only be offset if the materials are bought within the state.

The Indian government needs all the help it can get, according to Standard & Poor's rating agency, the budget deficit, including both the central and state governments, is expected to exceed 10 per cent of GDP this year, with a debt fast approaching 70 per cent of GDP, or more than 400 per cent of revenues - higher than in most similarly rated countries.

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